Supply and demand factors stimulate interest in platinum ETCs

Investment into exchange-traded commodities (ETCs) linked to platinum has surged over the past six months, and with good reason. Platinum, having hit a 17-month high on Thursday, closed yesterday at $1,714 per troy ounce, approximately 22% above where it was just six months ago.

Supply disruptions, most notably in South Africa, and increased demand for the metal in jewellery and automotive production have boosted the price of platinum.

Uncertainties surrounding South African production and strong belief that demand is set to rise have led to renewed interest in the industrial precious metal.

Last year’s violent South African miners’ strikes led Anglo American Platinum, commonly known as Amplats, to report a $710 million operating loss owing in part to a 6% drop in refined platinum production. Amplats matters because it is the world’s largest primary platinum producer, accounting for 40% of the world’s newly mined platinum.

Production concerns continue to plague the company, and the sector in general, and labour, energy and tax costs continue to rise.

In January, Amplats unveiled plans to mothball two South African mines, scrap 14,000 jobs and cut output by 20% to help return the company to profitability. Such a move would trim approximately 400,000 ounces of platinum production annually, equivalent to 7% of global output, putting significant upward pressure on prices.

FEATURED PRODUCT

ETFS Physical Platinum ETC (PHPT)

– Provides cost-effective direct physical access to
platinum held securely in vaults located in Zurich
and London

– 100% backed by physical allocated platinum
conforming to the London Platinum and Palladium
Market’s rules for Good Delivery

– Product has over $760 million in assets providing
high liquidity and tight spreads, thereby ensuring
competitive total cost of ownership

– UCITS compliant, London listed, UK Reporting
Status, eligible for ISAs and SIPPs, registered for
distribution across much of Europe, fee 0.49% pa

Although these plans have since been postponed following protestations by various stakeholders, including the South African government, the firm’s intentions remain clear.

Overall, primary platinum supply challenges are expected to continue during 2013 with higher mining inflation putting pressure on margins and increased risk of supply disruptions from industrial action in South Africa.

It’s no surprise, therefore, that foreign investment into the South African mining sector has tumbled. Companies are understandably cautious about investing into the area until there is more certainty. While South Africa’s Mining Minister, Susan Shabangu, last week attempted to reassure potential investors, significant question marks remain.

Switching to the demand side, healthy performances are expected in the automobile and jewellery sectors in 2013. Jewellery represents about 40% of overall platinum use, with a further 37% used for the production of vehicle catalytic converters. Both of these sectors were hit hard following the economic slump and were primarily responsible for the depressed price of platinum over the last year. But with analysts seeing signs of economic growth, both jewellery and vehicle demand are likely to put upward pressure on platinum.

While consumers in developed markets may be feeling the pinch, the burgeoning middle class in the emerging world is increasingly flexing its newly minted cash. Hong Kong-based Chow Tai Fook, the world’s biggest jewellery retailer by market value, reported revenue growth of 4% in the quarter ending in December last year. The growth was underpinned by stronger Chinese demand. In a stock note on the jeweller, Bank of America Merrill Lynch said: “the pace of growth is likely to gradually re-accelerate in the coming quarters driven by technical factors as well as demand recovery.”

Perhaps even more promising is the outlook for worldwide vehicle demand. Research firm JD Power predicts automobile production to surge, forecasting a rise from 81 million units in 2012 to 82.7 million in 2013, 89.7 million in 2014 and 96 million in 2015. In China, the world’s largest car market, automobile sales were a record 2.03 million vehicles last month, a significant increase on the previous January, according to data from the China Association of Automobile Manufacturers.

Commercial vehicles, which need larger catalytic converters and therefore a greater input of platinum, also look set for a major recovery in sales. According to a report from Scotia Bank, light truck sales in the US are set to record the highest figure in over twenty years.

Investors looking to take advantage of these supply and demand factors by investing in platinum can do so easily via a range of low cost physically-backed ETCs. Physical ETCs combine the advantages of physical ownership with the liquidity, transparency and ease of execution typical of exchange-traded products.

Among the most popular platinum products available to UK and European investors are ETCs issued by ETF Securities, Deutsche Bank and Source (outlined below). While the fine details of their legal and technical structures differ slightly, they all broadly do the same thing: provide cost-effective direct physical access to platinum.

ETFS Physical Platinum ETC (PHPT)
Issued by ETF Securities, the ETC is backed by physical allocated platinum held by HSBC in vaults located in Zurich and London. Only metal that conforms to the London Platinum and Palladium Market’s (LPPM) rules for Good Delivery can be accepted by the custodian. Each physical bar is segregated, individually identified and allocated. The product is listed on the London Stock Exchange and registered for distribution in Austria, Denmark, Finland, France, Germany, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden and United Kingdom. Annual management fee 0.49%.

db Physical Platinum ETC (XPLA)
Issued by Deutsche Bank, the ETC is backed by a direct investment in physical platinum, conforming to LPPM’s rules for Good Delivery, stored in secure vaults in London. Each physical ETC security entitles the holder to a specified quantity of platinum of the segregated pool owned by the issuer. The product is listed on the London Stock Exchange and SIX Swiss Exchange, and is registered for distribution in Austria, Belgium, Finland, France, Germany, Italy, Netherlands, Portugal, Spain, Sweden, Switzerland and the United Kingdom. Annual management fee 0.45%.

Source Physical Platinum P-ETC (SPPT)
Issued by Source, the ETC is backed by physical allocated LPPM-compliant platinum held securely in JP Morgan Chase Bank’s London vaults. The product is listed on the London Stock Exchange and is registered for distribution in Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden and the United Kingdom. Annual management fee 0.39%.

Each of the above securities has UK reporting Status and is eligible for ISAs and SIPPs.